Kiddy toy corporation needs to acquire the use of a machine to be used in its manufacturing process. the machine needed is manufactured by lollie corp. the machine can be used for 12 years and then sold for $17,000 at the end of its useful life. lollie has presented kiddy with the following options: (fv of $1, pv of $1, fva of $1, pva of $1, fvad of $1 and pvad of $1) (use appropriate factor(s) from the tables provided.) 1. buy machine. the machine could be purchased for $167,000 in cash. all insurance costs, which approximate $12,000 per year, would be paid by kiddy. 2. lease machine. the machine could be leased for a 12-year period for an annual lease payment of $32,000 with the first payment due immediately. all insurance costs will be paid for by the lollie corp. and the machine will revert back to lollie at the end of the 12-year period. required: assuming that a 10% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, determine which option kiddy should choose. ignore income tax considerations.
The lease would be a better option as their net preset worth is lower than purcahse the machine and carry their cost. Explanation: Option A purchase F0 -160,000 operating cost 5000 per year we solve for the present value of an annuity C5,000.00 time10 rate0.12 PV-$28,251.1151 PV of the salvage value Maturity $10,000.0000 time 10.00 rate 0.12000 PV 3,219.7324 present worth -160,000 – 28,251.11 + 3,219.73 = -185.031,38 Option B Lease 10 payment beginning immediatly of $25,000 Therefore, it is an annuity-due C25,000.00 time10 rate0.12 PV-$158,206.2448
The machine should be leased because it is cheaper when compared to buying the machine. Explanation: To determine which option kiddy should choose , we are to calculate the net present value of buying the machine and the present value of payments thay kiddy would make if they lease the equipment. Net present value is the present value of after tax cash flows from an investment less the amount invested. NPV can be calculated using a financial calculator: Cash flow in year 0 = $-161,000 Cash flow each year from year 1 to 11 = $-6,000 Cash flow in year 12 = $-6,000 + $11,000 = $5,000 I = 11% NPV = $-196,809.89 Present value of lease payment Cash flow each year from year 1 to 11 = $-26,000 I = 11% PV = $-161,369.40 The machine should be leased because it is cheaper when compared to buying the machine. To find the NPV using a financial calacutor: 1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction. 2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction. 3. Press compute Present value can be calculated using the same steps as above I hope my answer helps you
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